Mortgages for the Self-Employed
Here at Lloyd Wells Mortgages we get a lot of clients who are self-employed and are looking for help with their mortgages. Over the 20+ years of experience, we have come across every myth self-employed people worry about when they look to purchase their dream home, remortgage their property, or look to finance their Buy to Let portfolio.
Today we will look at 5 different myths around mortgages for the self-employed and we will tell you what the facts are.
How many years of accounts do I need to get a mortgage?
Let’s start off with the question we get asked the most, how many years accounts do I need to get a mortgage? With all of these questions, it will depend upon your individual circumstances, but to give you an idea of what the banks and building societies require, we can give you some outline criteria.
The easiest answer to this is 2 years worth of accounts. 90% of the mortgage providers will ask for two years tax calculations and tax year overviews along with 2 years of signed accounts for a limited company director. They will then take the lower of the average, or the latest years income.
That being said, there are a number of lenders who can go off your first years accounts and there are lenders who will look at 3 years accounts. The best thing to do is call us and we can go through your options.
If you are lucky enough to start your own business, hit the ground running and have a great first year, Halifax and TSB are able to use the income from your first year. There are also another 18 or so smaller lenders who may also be able to help with one years accounts.
We were recently approached by a Solicitor who had become a partner at his legal firm approach us as he was looking to purchase a home with his partner. He had been employed all his life, but had swapped over to self employed when he became a partner. In this circumstance, Nationwide and Accord were both able to take an employer’s reference and use his previous employed income, before he had produced his first tax returns.
I had a really good year, but my previous years weren’t as good. Will I have to wait another year before I can use this higher income to get a larger mortgage?
Most lenders are able to lend somewhere between 4 to 5 times your annual income. This means that if your income is £50,000, you’d be able to borrow somewhere between £200,000 to £250,000.
90% of lenders will use an average of the last 2 years income for the self-employed, so if you earned £20,000 last year and £50,000 this year, they would limit you to borrowing 4-5 times £35,000. This would be £140,000 to £175,000.
The good news is there are a number of lenders such as Santander who will be able to use your most recent financial accounts. They will still ask to see the last 2 years worth of accounts, but they are able to lend in the £200,000 to £250,000 bracket, meaning you can purchase that dream home a lot sooner than you may think!
Can I release equity from my home to put into my business?
We are often approached by self-employed clients who have businesses that are going from strength to strength. They are lucky enough to have some equity in their property and they want to release this to invest in their business.
90% of lenders wouldn’t be happy for them to do this, but there are a handful of lenders that allow capital raising to invest into a business. They aren’t happy with raising money to pay tax bills at the end of the year, but they will allow you to buy assets such as a new van.
Quite recently I had a restaurant owner who wanted to remortgage and raise money against their home to extend the restaurant and create and outdoor dining area. We proceeded with the West Brom Building Society who are able to lend up to 75% of a properties value for business purposes.
Again, there are 20 lenders who would be able to consider releasing equity to invest in a business.
We only take out of the business what we need to survive, will the lenders look at our retained profit?
If you are a director a limited company, there will be several legitimate ways you can take the money out of your business. For most of the high street, they will simply look at your salary, plus dividends. If you have any other income from other sources such as investments or property etc. they can take this into account but they will use what is shown on your tax calculations.
We do get scenarios where clients live a comfortable lifestyle and therefore don’t take everything out of the business they could do, as they don’t want to pay the extra tax if they can leave it in the business.
Last year we had a client who ran a successful recruitment consultancy in Bath who was looking to remortgage their home. They took their salary and some dividends, but what they didn’t need they kept in the business account. They also wanted an interest only mortgage and used the sale of the property as a repayment strategy. Clydesdale Bank were able to help as they used their salary plus their share of net profits. This meant that they were able to borrow significantly more with Clydesdale than they could with any other lender.
There 27 lenders who will use a variation of this criteria. Some will be salary plus net profits before tax, net profits after tax. Some can help with interest only, some can’t.
My income is less than £25,000, can I get a BTL mortgage?
We were recently introduced to two brothers who had a property they had rented out for a number of years. They were both self-employed but didn’t think they could get a mortgage due to their incomes being below £25,000. They were sat on a high standard variable rate costing them £100’s and they didn’t know what to do.
You may be seeing a bit of a theme here, but most lenders will need you to have a minimum income of somewhere between £20,000 to £30,000. The good news is that if you are an existing landlord, the criteria becomes very lenient. Birmingham Midshires who are part of the Lloyds group and one of the biggest players in the BTL sphere say there is no minimum income required, must have earned income or pension income covering commitments. TMW who are part of Nationwide and also a huge lender in the BTL market simply say, “no minimum income assessment”.
Since the Mortgage Credit Directive Order in 2016, it has become harder to get a BTL mortgage. The key is to seek the right advice to make sure that the process is as simple as possible.
If you are self-employed and looking for a mortgage, then do give us a call on 01174 520 330. Our initial conversations usually last around 15 minutes.
Alternatively, you can email email@example.com and let us know how we can help you.
We will discuss:
- How much you can borrow
- What that will cost
- What fees can you expect
- How Lloyd Wells Mortgages work
- What insurances you will need
- What documentation you will need to provide
- Next steps
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage